Payroll Tax
Cut for Employees But No Relief for Employers |
The House and Senate approved the extension
of the payroll (Social Security) tax cut. The last
extension ended in December 2011. The extension will now
last until December 2012. The Social Security Tax cut was
first reduced under the Unemployment Insurance and Reauthorization and Job Creation
Act of 2010. It will now go to the President for
his signature. |
The payroll tax cut being
extended is the Social Security contributions that employees
make to the Social Security Fund. Before the reduction the
rate was set at 6.2% of an employee’s taxable income. The
reduction was from 6.2% to 4.2%. Thus, saving the employee
2%. |
However, there is no relief for the employer
who is still required to pay his 6.2%. Both employee and
employer are required to pay Social Security Taxes. Before
the reduction, the employee would normally pay 6.2% and the
employer would pay the other 6.2%. With the reduction the
employee will only pay 4.2%. The employer will continue to
pay 6.2%. |
Social Security taxes are paid based on a
wage base. In 2011 the wage base was $106,800. For 2012
the wage base was raised to $110,100. Hence, increasing the
total amount that have to be paid in taxes. |
If you’re
self-employed you get the 2% employee reduction.
Self-employed individuals have to pay both the employee and
employer portion of Social Security taxes. Hence the
effective Social Security tax for 2012 for the self-employed
is 10.4%. |
The reduced tax rate
for earnings in 2012 applies only to the first $18,350 of a
worker’s total wages and self-employment income. The limit
of $18,350 is two-twelfths of the $110,100 taxable earnings
limit for 2012. Hence, this is not as big a tax relief as
you may think. |
Sources:
The Library of Congress Thomas
Social Security Administration
Unemployment Insurance and Reauthorization and Job Creation
Act of 2010
by Tim Miller |